Simple answer is, it depends. Let’s explore some of the confusing jargon and concepts in this topic, and remove the mystery of this question for you.

Funds available

This is the total amount of money you can pay towards your property. You could factor your personal savings and other funds such as gifts from family in to this.

Upfront costs

This includes fees and other costs that you’ll need to pay upfront and out of pocket to buy a home. You should read up on costs involved in buying a home. Common costs associated with buying a property include:

      • stamp duty (land transfer duty)
      • conveyancing
      • home and contents insurance
      • loan application fees
      • Lenders mortgage insurance (LMI, if applicable, more on this in a bit)

First home buyers may be eligible to reduce upfront, out of pocket, costs thanks to some government programmes, be sure to explore those here.

Deposit

This is the amount you are left with after you take out upfront costs from the funds available to you. Here’s a deposit calculator for you to calculate amount left for a deposit after estimated upfront costs.

           deposit =  funds-available – upfront-costs

Loan

Loan is the amount you need to borrow to be able to purchase the property. You can use a borrowing calculator find out how much you could borrow.

           loan = property-price – deposit

Loan to value ratio (LVR)

LVR is the amount you need to borrow compared to the lender-assessed property value and is expressed as a percentage. 

           LVR = (loan / property-price) * 100

For example, if you have a deposit of 30% of the lender-assessed property value, you may need a home loan for the remaining 70%. That means your LVR would be 70%.

Lenders consider home loan with an LVR of more than 80% risky and apply a higher interest rate or include a insurance(LMI) premium to cover themselves for the risk taken. Although most lenders lend up to 95% of the assessed property value, higher LVR attracts higher interest rates and higher insurance premiums. It is worth getting your head around LVR properly, so make sure you read up on LVR to understand things in a bit more detail.

Lenders mortgage insurance (LMI)

Generally, LMI is a type of insurance you may need to pay for if your LVR is over 80%. Basically, it provides protection to your home loan lender in the event you default on your home loan. If the proceeds from the sale of your house aren’t enough to pay back the amount owing on your mortgage, LMI may cover the lender for that loss. There’s a bit more to LMI than that. Make sure you fully understand how it works and when you might need it by reading this article on LMI and how it works.

Note: some lenders might be able to package LMI into the home loan, be sure to check with your lender if this is a possibility.

Why a bigger deposit might be better?

With what we have learnt so far, it is apparent that a bigger deposit may be better for the following reasons:

  • Generally, a big deposit indicates strong financial stability and saving ability – and this may increase the likelihood of your home loan application being approved
  • A bigger deposit means not having to borrow as much money, which in turn means paying less interest over the life of your home loan and even paying off your loan sooner
  • A deposit of more than 20% of the lender-assessed property value limits added upfront costs such as LMI, enables better interest rates and a lower loan to pay

When a higher LVR may be beneficial?

Although there are obvious downsides to a higher LVR home loan, there are also times where this could be beneficial. The biggest hurdle to entering the property market with your first home is saving up a home loan deposit. You could consider a higher LVR home loan if You would like to:

  • Capitalise on the opportunity in a property market that is at value or is set to grow
  • Get into the market and build home equity by repaying home loan right away
  • Take benefit of locking in on a lower interest rate that is expected to rise in the coming years

Summary

  • Make sure you understand Loan to Value Ratio, Lenders Mortgage Insurance and other concepts involved.
  • Don’t forget to consider upfront transaction costs and fees you may have to pay out of pocket.
  • A deposit of 20% or more is generally better.
  • A higher LVR home loan may be beneficial at times but remember to take the challenges and risks involved (such as higher payments if interest rates rise) into consideration before you decide.